Africa: Economic Policy Lessons,1/2, 08/02/03

The Economic Commission for Africa (ECA) annual Economic
Report on Africa, released on July 30, painted a sobering
picture of slowed growth rates for 2002 and "mixed"
prospects for 2003, while citing successes in some
countries. In addition to a continent-wide review,
the report also contains detailed studies of Mauritius,
Rwanda, Ghana, Gabon, Egypt, Mozambique and Uganda

An earlier E-Journal posting contained summary observations
from the report on the current economic situation in
Africa. Today's two postings contains the sections
from the report's overview with policy proposals emerging
from the country studies. The full report is available
in PDF format on the ECA website at

http://www.uneca.org/era2003

+++++++++++++++++end summary/introduction+++++++++++++++++++++++

DISTILLING LESSONS FROM THE SEVEN COUNTRIES

The countries profiled in this year's Report reveal
the range of African policy challenges. Summarized
here are four key challenges in accelerating the pace
of development:

IV. Moving to mutual accountability and coherence--taking
the best route to development effectiveness. [see part
2]

The purpose is to highlight best and worst practices,
draw lessons from the experiences of the seven countries,
and provide overall policy guidance to African countries.
The countries profiled this year are Egypt, Gabon,
Ghana, Mauritius, Mozambique, Rwanda, and Uganda.

I. ESCAPING POVERTY--GOING BEYOND AVERAGES

The remarkable consensus and commitment for poverty
reduction from governments around the world led to
the Millennium Development Goals, to reduce the proportion
of people in poverty by 50% by 2015 and to reduce other
forms of human deprivation. Even if the absolute poverty
goal is achieved and prospects for doing this are good
for several African countries deep pockets of poverty
will remain within countries. People chronically poor
suffer poverty for many years, often for a lifetime,
and are likely to transfer their poverty to their children.
These are the people who benefit least from economic
reforms. They experience social exclusion, because
of gender, ethnicity, disability, caste, or social
position.They often live in remote ar1eas under harsh
agroclimatic conditions.

Recent evidence suggests a strong relationship between
poverty and agroclimatic conditions in various African
countries (ECA 2002). Large differences in living standards
between regions in the same country are correlated
with unequal distributions of natural assets, differences
in agroclimatic conditions, or differences in geographic
conditions, such as remoteness from markets and transport
routes (Bigman and Fofack 2000). This is intuitive.
Households in remote areas, living on fragile lands,
would be expected to have fewer opportunities and face
greater risks and vulnerability than households in
better-endowed areas. It is also consistent with the
fact that poverty is more severe in rural Africa than
in urban. Several country profiles underscore this
important point the need to focus on spatial and temporal
dimensions of poverty. Uganda's solid economic growth
averaging 6% a year over the past decade has been accompanied
by substantial poverty reduction, but there remain
vast regional disparities in the incidence of poverty,
with a clear spatial pattern. The more affluent central
crescent area around Lake Victoria has made great strides
in economic development, while the drier, more disadvantaged
northern part of the country has fallen even farther
behind. Uganda's case is of concern because the spatial
divide in poverty has been accentuated by almost two
decades of civil conflict.

The spatial dimensions of poverty are also evident in
Egypt, Ghana, and Mozambique. In Egypt--one of Africa's
emerging modern economies--the absolute level of poverty
has declined, but in upper Egypt it increased between
1996 and 2000. In Ghana, national statistics show a
decline in poverty from 52% to 40% over the past decade
lifting 2 million people out of poverty. But those
statistics mask an increase in poverty in 3 of 10 regions
central, northern, and upper east. In Mozambique one
of the fastest growing economies in Africa poverty
remains stubbornly high at 62% of the population, but
it is clearly worse in the north.

The countries covered in this report suggest several
ways of tackling spatial-temporal poverty. This overview
highlights three particularly innovative strategies:
poverty-sensitive distribution formulas for fiscal
transfers, public expenditure tracking systems, and
private provision of social services.

Government spending should be poverty sensitive

Uganda has found that government expenditures (through
various fiscal transfer mechanisms) do not adequately
redress regional inequalities. The current transfer
payment formula allocates 85% of transfers according
to the size of the district population and 15% according
to the geographical location, with no consideration
to poverty.

The regional distribution of transfers to local governments
indicates that the western region has received the
largest share (27%), followed closely by the eastern
(26%), the central (25%), and the northern (22%), where
poverty is highest. But if the transfer payment formula
considered poverty across districts, in addition to
population and size of the districts, more transfers
would go to the northern districts. Such a povertysensitive
distribution would allocate 29% to the northern region,
26% to the western, 23% to the central, and 22% to
the eastern.

Public expenditure tracking systems

Addressing spatial poverty also depends on how resources
are translated into basic services for the poor in
such areas as health, education, water and sanitation,
and energy. Public spending on these services is often
biased against the poor and against rural dwellers.
Ghana shows significant inequality in the distribution
of educational facilities among the 10 regions and
between rural and urban areas. Literacy and enrolment
rates are lower in the poorer northern regions, with
poor school conditions, low quality, irrelevant curriculums,
and a lack of teachers. Accentuating the problems:
the higher cost of schooling, with poor parents having
to bear any additional costs.

Even when public spending is reallocated towards the
poor, the delivery of services too often fails the
poor.This may be due to corruption, imperfect monitoring
of local government expenditures, and weak capacity
of local governments. Rwanda and Uganda have tried
to improve services by involving poor people in services
through the Poverty Reduction Strategy process and
by improving local expenditure monitoring systems.

Uganda has had impressive results with its Public Expenditure
Tracking System, introduced in 1996. The flow of intended
capitation grants reaching schools shot up from 13%
(on average) in 1991-95 to about 80-90% in 1999-2000.

Private participation in service delivery Most public
delivery systems are highly centralized, with almost
all human development programmes designed and controlled
by central authorities. Given the weak national institutions,
this centralization reduces the effectiveness of human
development efforts. These overly centralized systems
focus on inputs rather than outcomes, are associated
with low transparency and accountability, and ultimately
produce inferior service delivery (Jimenez 1995;World
Bank 2000).

To improve service delivery, governments are relying
more on private provision and financing, as for health
and education in Egypt and Ghana. Private participation
in the provision of health services in Ghana is quite
intensive, with about 42% of health facilities owned
by the private sector. But private facilities are concentrated
in the urban areas. Only mission hospitals are predominant
in the poor regions. The best way to improve private
participation in poor rural regions? Encouraging community-based,
NGO-run health and education facilities.

II. ACHIEVING FISCAL SUSTAINABILITY--EXITING AID DEPENDENCE

Many countries profiled in this report depend on foreign
aid to fund large amounts of government spending, consumption,
and investment. For instance, aid accounts for more
than 50% of Uganda's budget, 60% of Rwanda's, and 70%
of Mozambique's. Yet there is mounting evidence that
aid in large quantities is a double-edged sword initially
helping but eventually weakening a country's economic
performance (Lancaster and Wangwe 2001). Recent research
shows that foreign aid crowds out private investment
a damning indictment, because the early rationale for
foreign aid (the two-gap model) was to narrow the gap
between savings and investment in poor countries (Clemens
2002). Private investment is the most robust variable
in explaining cross-country growth. And if foreign
aid crowds out private investment, the prospects for
greater prosperity in aid-dependent countries are slim.

Nowhere is this more evident than in Ghana, which has
undertaken significant reforms over the past 20 years
but has little to show in tangible benefits for the
majority of its people. The high aid dependence reflected
in poor fiscal sustainability has hurt the Ghanaian
economy, with fiscal woes providing an important explanation
for the lacklustre economic performance. A chronically
weak fiscal position resulting in huge budget deficits
and associated spikes in inflation often associated
with political economy issues heightened uncertainty
over the credibility of government policies. This increased
the risk premium associated with investing in Ghana,
leading domestic and foreign investors to adopt a wait-and-see
attitude.

The huge fiscal deficits led to explosions in domestic
debt. Financing the domestic debt has crowded out credit
to the private sector, further constraining financing
options for firms. Financing deficits by issuing high-yielding
treasury bills inverted the yield curve for government
securities, giving higher rewards to investors in short-
dated securities than in long-dated securities.With
many investors preferring short-term government treasury
bills, private firms have had trouble raising long-term
capital. This has also shifted resources from the securities
market to the government bill market, leaving the securities
market thin and illiquid.

Egypt's fiscal deficit has also been on the rise. Like
Ghana, it has seen rapidly rising domestic debt, with
interest payments on this debt, along with the wage
bill, taking up around half of public expenditure.
Because these areas of expenditure cannot be cut back
easily, they seriously reduce the authorities' room
for maneuver in fiscal policy. With sluggish economic
growth and high domestic interest rates the ratio of
domestic debt to GDP is likely to continue to rise,
posing difficulties in macroeconomic management.

Heavily Indebted Poor Country status confers benefits
and risks

Foreign aid provided through concessional loans to many
African countries over the past several decades has
created large debt overhangs and significant debt servicing
obligations. The poor fiscal state of several African
countries and their high levels of external debt led
the World Bank and the International Monetary Fund
(IMF) to develop the Heavily Indebted Poor Countries
(HIPC) Initiative. The programme contemplates forgiving
a fraction of these countries' bilateral and multilateral
debt.

The funds freed by debt relief are to be devoted to
effective social programmes, which in the eyes of the
multilateral institutions will reduce poverty. In addition,
the country is expected to impel broad economic reforms
to strengthen the productive sector and increase the
potential for growth. An important principle guiding
the programme is that in the post-HIPC era the country
will achieve "external sector sustainability",
and thus not require new rounds of debt forgiveness.
The Bank and the IMF (2001, p. 4) have stated this
principle in the following way: [B]y bringing the net
present value (NPV) of external debt down to about
150 percent of a country's exports or 250 percent of
a country's revenues at the decision point, [the programme]
aims to eliminate this critical barrier to longer term
debt sustainability for these countries.

An important question tackled here is what type of fiscal
policy will be consistent with maintaining debt sustainability
in the post-HIPC era. As the excerpt above suggests,
the multilaterals have focused on policies required
to stabilize the ratio of external debt to exports.
The Ghana profile shows that a comprehensive answer
to the fiscal sustainability question requires going
beyond the country's external debt to the sustainability
of aggregate public sector debt, including both foreign
and domestic debt. Ghana has accumulated a significant
stock of domestic debt, purchased by the local banking
sector, pension funds, and individuals. Indeed, by
ignoring domestic debt, sustainability analyses may
underestimate the fiscal effort that poor countries
will have to make in the post-HIPC era.

Such large fiscal adjustments could have important political
economy consequences (Edwards 2002). First, the adjustments
may reduce the funds available to implement the antipoverty
programmes. And second, very large reductions in primary
expenditures may lead to political instability and
backtracking on reform.

Slipping back into the debt trap

Unless HIPC countries, such as Ghana, Uganda, and Rwanda,
receive substantial concessional aid in the future,
their public sector debt is likely to become unsustainable
once again. Uganda, the first country to graduate from
the enhanced HIPC programme in 2000, is in a difficult
situation. The debt and debt service indicators in
net present value terms show that its debt sustainability
has not improved since it received HIPC debt relief.
The net present value of debt to exports ratio increased
from 170% in 2001 to 200% in 2002 and is projected
by the IMF to increase to 208% in 2003, well above
the threshold of 150% under the enhanced HIPC framework.
Similarly the net present value of the debt-GDP ratio
is projected to increase from 20% in 2001 to 22% in
2003.

The reason for sliding back into the debt trap: without
large volumes of concessional assistance, these countries
would be forced to undertake major fiscal adjustments
to achieve sustainability (Edwards 2002). Adjustments
of this magnitude usually crowd out social expenditures,
including poverty alleviation programmes, and tend
to create political economy difficulties.

The optimal size of a fiscal deficit

The fiscal sustainability question in Rwanda is slightly
different. Tensions are emerging between the requirements
for macroeconomic stability and for poverty reduction
and post conflict construction. The fiscal deficit,
on the rise in recent years, is projected to remain
high over the medium term. The reason is the increase
in public expenditures to address poverty reduction
goals set out in the Poverty Reduction Strategy and
the need for post-conflict reconstruction for demobilization
and for establishing peoples courts, the genocide survivors
fund, and governance commissions. Some development
partners recommend that a country like Rwanda, with
large fiscal deficits financed by grants and international
borrowing, should reduce the deficit in the medium
term rather than mobilize additional resources.

Further contradictions have emerged with Rwanda's HIPC
status. The use of exports in the HIPC debt ratios
implies that absolute levels of debt per capita will
be particularly low for a closed economy, such as Rwanda.
This has increased the debt relief but it will also
reduce the possibilities for new borrowing. So, over
the medium term, rising spending needs for poverty
reduction and post-conflict reconstruction mean that
Rwanda is unlikely to adhere to low debt to GDP ratios
as required by HIPC.

The reason? Doing so would reduce the government's ability
to contract new loans. It is clear that adherence to
HIPC debt ratios has hidden costs that may easily outweigh
the benefits.

Several lessons from Rwanda question the relevance of
current modalities in the HIPC programme. First, as
illustrated in the profile, Rwanda's underlying debt
sustainability indicators appear to be flawed. Much
of the sustainability analysis by the World Bank and
IMF is based on rather optimistic assumptions for future
economic performance, the external environment, and
projected financing needs.

Second, macroeconomic sustainability cannot be divorced
from political sustainability. The legacy of violence
must be considered, especially with past civil violence
a strong predictor of future violence. The needs of
social and political reconciliation are therefore critical.
And a macroeconomic programme that does not address
these issues could be dangerous.

An alternative to the HIPC criteria would be to link
debt relief to a proportion of revenues needed for
essential spending, possibly with different limits
set for different groups of countries. One proposal
is to add a criterion for countries emerging from conflict
putting an upper limit to the fiscal revenues used
for debt servicing. HIPC needs must also take greater
account of external shocks and the critical role of
declining terms of trade in the buildup of debt, an
issue so far neglected (Birdsall and Williamson 2002;
Nissanke and Farrarini 2002).

Even strong performers are concerned about fiscal imbalances

The Mauritius profile highlights another angle in fiscal
sustainability. With stellar macroeconomic performance,
the economy grew 5 6% a year over the last 20 years.
Inflation remained in single digits. And the fiscal
deficit averaged about 4% a year between 1985 and 1999.
But in 2001 it jumped to about 6.7% of GDP, and for
2002 it is expected to remain around 6% 6.5%, narrowing
to previous levels from then onward.

These higher deficits are the result of a massive investment
programme by the government to prepare the Mauritius
workforce and infrastructure for economic diversification
away from the traditional sectors of sugar, textiles,
and apparels, now losing their potential as engines
of growth, and towards a knowledge-based economy. There
is concern among some development partners that higher
deficits will threaten fiscal sustainability. The analysis
here shows that this may not be the case.

The main issue is to resolve the tension between higher
deficits in the short term and investment that may
yield higher returns in the medium to long terms.

A smooth exit requires a strong private sector

Exiting aid dependence and improving the fiscal position
of African countries will require governments to implement
policies and use resources to promote growth that will
expand public revenues and obviate the need for future
aid.

A strong private sector is critical to achieving this
goal. Only through a strong private sector that contributes
to the state's coffers will the abysmally poor fiscal
position of African countries be improved. The point
is not that countries should not improve tax administration
and reduce leakages due to inefficient spending it
is that they should also take actions to broaden the
tax base, so that they can get more tax revenues for
the same marginal tax rate.

Managing the transition to less development assistance
and more private capital flows will require a combination
of measures to increase domestic resource mobilization,
provide greater debt relief, reform the current aid
regime, improve market access, and enhance the policy
environment. This will include improving the business
climate strengthening corporate governance, commercial
justice systems, and the regulatory environment. It
will also include improving pricing and access in electricity,
transportation, and telecommunications, igniting the
private sector's supply response.

The Economic Commission for Africa (ECA), in its annual
Economic Report on Africa released on July 30, painted
a sobering picture of slowed growth rates for 2002
and "mixed" prospects for 2003, while citing
successes in some countries. In addition to a continent-wide
review, the report also contains detailed studies of
Mauritius, Rwanda, Ghana, Gabon, Egypt, Mozambique
and Uganda

An earlier E-Journal posting contained summary observations
from the report on the current economic situation.
Today's two postings contain the sections from the
report's overview with policy proposals emerging from
the country studies. The full report is available in
PDF format on the ECA website at

http://www.uneca.org/era2003

+++++++++++++++++end summary/introduction+++++++++++++++++++++++

DISTILLING LESSONS FROM THE SEVEN COUNTRIES

The countries profiled in this year's Report reveal
the range of African policy challenges. Summarized
here are four key challenges in accelerating the pace
of development:

IV. Moving to mutual accountability and coherence--taking
the best route to development effectiveness. [below]

The purpose is to highlight best and worst practices,
draw lessons from the experiences of the seven countries,
and provide overall policy guidance to African countries.
The countries profiled this year are Egypt, Gabon,
Ghana, Mauritius, Mozambique, Rwanda, and Uganda.

III. ENERGIZING AFRICAN BUREAUCRACIES WITH MORE CAPACITY
TO DELIVER

The public service bureaucracies will play a critical
role in accelerating the pace of development (figure
1). Yet they play a contradictory role, at once part
of the problem and part of the cure (Kayiizi-Mugerwa
2003). Economic reforms are matters of public policy.
But policies are no more effective than the bureaucracies
trying to implement them.

Egypt and Ghana demonstrate the predicament. Despite
20 years of institutional reforms in the public sector,
there is little to show for it.These reforms, like
those in many African countries, focused on quantitative
issues--wage and hiring freezes, downsizings, and retrenchments.They
paid little attention to more subtle and challenging
issues of bureaucratic quality. In Egypt, state capacity
needs badly to be reinvigorated to improve export competitiveness
and propel the economy to a higher stage of development.

But the reform of institutions faces political and administrative
constraints. In Ghana the situation has deteriorated
so much that the current government now faces a crisis
in the public service. Two statements from the Ghana
Poverty Reduction Strategy reinforce this assessment
(Ghana 2003, p. 109): It would appear that the totality
of the public sector reform programme might be beyond
the capacity of the available human and financial resources
to plan and implement. However the reform process cannot
proceed effectively without sustained and palpable
political commitment, the enforcement of agreed proposals
for reform from a political and official level and
provision of adequate resources.

The key reform in Ghana--the Public Financial Management
Reform Programme, initiated in 1995--introduced an
integrated payroll and personnel database, a medium-term
expenditure framework, and a budget and public expenditure
management system. But at the end of 2002 the government
was still grappling with the same issues as in 1995.
Several factors are responsible. But compensation and
ineffectual management of the public service including
the absence of an overall human resource development,
use, and retention strategy are the prime causes.

Participatory policymaking can be highly effective

In stark contrast, the policy formulation process in
Mauritius "contains a very strong dose of consultation,
dialogue, consensus building, and democratic principles,
ensuring that all concerned stakeholders are actively
involved" (Bonaglia and Fukusaku 2002, pp. 171-73).
Public-private partnership is pervasive in Mauritian
policymaking, and nongovernmental organizations have
always been an important part of Mauritian society.
As a direct result, public policies have supported
high rates of private investment.

The Joint Economic Council is the private sector's apex
organization.When a private sector position needs to
be voiced, the council expresses it after consulting
with members. At least twice a year the government
holds meetings with the council, chaired by the prime
minister and attended by senior ministers. Structured
consultations are also held with private sector organizations,
trade unions, and the minister of finance to prepare
the national budget. Between budget preparations sessions,
there is constant dialogue between the private sector
and government through meetings on specific policy
matters. Business, labour unions, and government are
involved in tripartite wage negotiations.

Private sector and union representatives sit on the
National Negotiating Committee on Post-Lome discussions,
the World Trade Organization standing coordination
committee, and the Regional Cooperation Council. They
also take part regularly in World Trade Organization
ministerial conferences.

The participatory policymaking in Mauritius enables
all stakeholders to shape the national economic strategy,
with private needs reflected in government policy,
in line with the country's development objectives.

MOVING TO MUTUAL ACCOUNTABILITY AND COHERENCE--THE BEST
ROUTE TO DEVELOPMENT EFFECTIVENESS

There is much dissatisfaction with the state of development
partnerships in Africa (ECA 2001). It stems from a
vicious circle of high expectations, grand promises,
and only partial accomplishment of goals. There is
also the frustration of Africans (that expected benefits
were not fully realized) and of development partners
(that implementation was not as expected and the funds
provided were not used effectively). The African side
blames unrealistic project design, excessive conditions
(some of which were just plain wrong), and slow and
unpredictable access to promised funds. The donors
blame corruption, inadequate political will, and poor
implementation by the Africans. There is considerable
evidence to support both points of view (Lancaster
and Wangwe 2001).

If the pace of Africa's development is to be accelerated
it is imperative that the relationship between Africa
and its partners be within the context of interdependence,
cooperation, and mutual accountability (ECA and OECD
2002). That is the emerging consensus. Predictability
and accountability should be mutual. National leaders
should carry out their programmes and inform supporting
partners of any changes. Partners should provide the
promised resources in a timely manner or consult on
the proposed changes. Each should be accountable for
fulfilling commitments. Agreements should be clear,
stating events and timing, with all to be monitored.

This consensus is reflected in the pledge by world leaders
at the UN Conference on Financing for Development in
Monterrey: A substantial increase in ODA and other
resources will be required if developing countries
are to achieve the internationally agreed development
goals and objectives, including those contained in
the Millennium Declaration. To build support for ODA,
we will cooperate to further improve policies and development
strategies, both nationally and internationally, to
enhance aid effectiveness (para 22).

The international community is also committed to intensifying
efforts to lower external debt burdens, improve market
access, and reduce constraints that prevent poor countries
from fully realizing the benefits of globalization.
In turn, developing countries acknowledged that they
must take responsibility for good governance and sound
policies, as African leaders are doing under the New
Partnership for Africa's Development (NEPAD). These
leaders have committed to implementing sound economic
policies, tackling corruption, putting in place good
governance, investing in people, and establishing an
investment climate to attract private capital. Mutual
accountability requires that pledges by both sides
be monitored. Box 2 describes an indicative "first
set" of performance indicators that could be used
to jointly monitor progress by African countries and
external development partners on specific commitments
and related reform efforts.

Increase the predictability of aid flows

Several country profiles underscore the importance of
mutual accountability for development effectiveness.
For instance, an important feature of mutual accountability
is that partnership arrangements should be clear and
predictable. It is accepted that major changes in a
recipient country may legitimately require a revaluation
of partnership agreements (for instance, if serious
conflict breaks out in the country that had been peaceful
and secure). This was the case in Uganda, where an
unplanned increase in defense spending of about 0.5%
of GDP in 2002/03 budget led to a reevaluation of multilateral
and bilateral relationships. Defense expenditures are
projected to be around 5.6% of GDP in 2002/03 compared
with 4.6% in the pervious three years. The rise in
the defense budget, especially the spending over budget,
has raised concerns among several donors, with the
government arguing that the increase in spending is
necessary to decisively address the security situation
in the north.

However, the foreign partner too frequently makes unilateral
changes in agreements without consultation. The result:
serious disruption of important national programmes
and uncertainty about how to plan for the future. In
Ghana development assistance that was expected in January
1, 2002 was belatedly received on December 31, 2002.
The budget deficit rose to 6.9% of GDP in 2002 (from
4.4% the year before) partly because only 18% of promised
grants had been received by the third quarter.

Mutual accountability requires clear understanding by
both parties about the timing of release of promised
aid funds, and donors should be held accountable for
delivering on their promises. Consultation should be
the rule if changes are thought to be needed.

To address the unpredictability of aid flows, donors
need to programme their aid over a multiyear timeframe
consistent with the financial planning horizon of recipient
governments.

For this to happen:

* Medium-term commitments should be aligned with medium-term
expenditure frameworks, so that the country can plan
Poverty Reduction Strategy activities well in advance.

* Yearly disbursements should be aligned with the fiscal
budget so that countries can deliver services planned
in the medium-term expenditure framework.

* Development partners should provide recipient governments
with full information on aid flows, on a regular and
a timely basis.

* Development partners should let the recipient government
know in advance what information should be included
in the annual reviews, streamlining the requests and
reducing the number of additional ad hoc requests for
information.

Consider Rwanda, where the British government in 1998
entered a 10-year relationship to improve the predictability
of resource flows and set up an independent body to
review donor practices. The United Kingdom has also
led the way in shifting funding towards budget support,
with a new programme of budget support of 76 million
pounds for 2000-03 agreed in 2000.

Reduce donor "frenzy"

Partnership based on mutual accountability should reduce
the high transaction costs for recipient countries.
Many African countries receive assistance from several
partners in the same economic sectors, with each partner
insisting on detailed conditions for its assistance.
The conditions exacted by the partners often are not
consistent. And the timeframe for the partner agreements
tends to be short, creating uncertainty for ongoing
programmes and requiring the time of national leaders
to negotiate follow-on agreements.

Reducing the high transactions cost requires improving
donor coordination and harmonizing development assistance
programmes. For this the partners need to align their
policies and programmes with the Poverty Reduction
Strategy or other nationally owned development plans.

The Uganda profile shows that donors are aligning their
programmes around the PRS. But this is not happening
across a wide range of countries.For example, in Mozambique,
where some progress has been made in this regard, the
government is concerned about the burden presented
by project aid that bypasses national systems and priorities.
Aid there is fragmenting ministries, weakening national
and ministerial identity, and undermining authority.

Rwanda has new Guidelines for Productive Aid Coordination,
with the Poverty Reduction Strategy now providing the
framework for aid coordination. It is also considering
a lead agency arrangement, with the largest donor to
a sector taking the lead in that sector. A lot more
needs to be done in this area (box 3).

Reducing transaction costs may require that development
partners move away from project aid towards budget
support, which for countries with transparent budget
procedures and sound public expenditure management
systems is another critical feature of mutual accountability,
as in Ghana.

The government of Ghana has a multidonor budgetary programme
to support the Poverty Reduction Strategy, requiring
donors to provide resources through the government
budget and in line with the budget cycles. Participating
development partners follow common rules for disbursement
and commit themselves to firm financing over the coming
year, with indicative commitments for the following
two years. Funds are not earmarked for specific activities.
Instead, the government and the development partners
participating in the programme have agreed to focus
on some key reform areas viewed as critical for the
successful and efficient implementation of the strategy:
public finance accountability reforms, budget processes,
decentralization, civil service reform, and governance.
For each area of priority actions, a policy matrix
will provide benchmarks for monitoring progress. The
process is facilitated through regular quarterly mini-consultative
group meetings. Regular monitoring reports from the
government will be in a standard format, including
quarterly reports on macroeconomic indicators, the
policy matrix, expenditures against the budget and
releases, and implementation of the strategy. In turn,
development partners are to provide quarterly reports
on disbursements and projections of disbursements for
the next two quarters.

Making development policies coherent

The success of development policy depends on the effects
of other policies, which intentionally or unintentionally
may impair development cooperation. The coherence of
development policies has to do with ensuring that all
policies affecting African development prospects are
synergistic and do not conflict or nullify each other.
A lack of coherence has been shown to lead to ineffectiveness
(failure to achieve objectives), inefficiency (waste
of resources), and loss of policy credibility.

Chapter 1 of the report documents several examples of
incoherence in the development policies of Africa's
major partners. For example, the EU advocates African
countries' integration into the world economy, but
its trade policy has numerous protectionist elements,
especially in agriculture.An open trade policy and
dismantling of the Common Agricultural Policy would
complement EU development efforts rather than frustrate
them.

To improve food security in West Africa, German development
cooperation has promoted beef production in that region,
but the success of these projects has been threatened
by subsidized EU beef exports to the same countries.
The 2002 U.S. Farm Bill, scaling up subsidies, is another
example of a policy that conflicts with the government's
pledge to reduce poverty in Africa.

In general, Africa's international partners have not
implemented their commitments, particularly for enhancing
market access and eliminating trade-distorting agricultural
subsidies. Abolishing OECD agricultural subsidies would
provide developing countries with three times their
current ODA receipts. The elimination of all tariff
and non-tariff barriers could result in static gains
for developing countries of around $182 billion in
services, $162 billion in manufactured goods, and $32
billion in agriculture.

Tariff escalation in the international trade regime
makes it difficult for African countries to diversify
their economies towards high-value-added processed
goods. Tariff peaks rates above 15% are often concentrated
in products of export interest to developing countries.
Two sectors that matter most for developing country
exporters are textiles and agriculture.Tariff barriers
in textiles remain high, while high tariffs for agricultural
commodities and the continued subsidization of agriculture
in many OECD countries repel agricultural exports.

The success of the Doha Development round of multilateral
trade negotiations is crucial for improving market
access for Africa's exports. But given the apparent
breakdown in these crucial talks, there is a strong
case for OECD countries to frontload the benefits of
trade liberalization for the poorest countries by providing
immediate duty-free and quota-free market access.

Because Africa depends more on external trade than do
other developing regions, expanding market access for
its exports is a clear priority.Of developing country
GDP in 2001, 34% came from the exports of goods and
services, but for Sub-Saharan Africa, the figure was
40%.

Mutual accountability--Africa's role

Mutual accountability is a two-way process. Partners
have to fulfill their part of the bargain, and Africans
have to fulfill theirs. For Africans, the commitment
to self-monitoring and to peer learning is the linchpin
to accountability. (This is distinct from the accountability
of having recipients report their compliance with donor
requirements, including conditionality.) NEPAD is implementing
an African Peer Review Mechanism (APRM) to encourage
self-monitoring and peer learning (box 4). This systematic
assessment tool will track progress of outcomes, identify
and reinforce best practices, assess capacity gaps,
and implement the required corrective actions.

Several African countries have already agreed to undergo
peer reviews. What is left now is to move forward with
implementing APRM and show that African countries are
fulfilling their side of mutual accountability.

Good governance is the key to mutual accountability

Several country profiles demonstrate the progress African
countries have made in improving governance. In Mozambique
the current president has announced that he will step
down in 2004 and refrain from anointing a successor.
This is a potent signal of the political leadership's
commitment to democracy and the rule of law. Rwanda
is also taking positive steps towards deepening democracy
and good governance, announcing that multiparty presidential
and parliamentary elections will be held in mid-2003.
Crucial to the success of this gradual political normalization
are attempts to foster social reconciliation through
local tribunals, aimed at paving the way for the eventual
reintegration of genocide suspects into their communities.
Connected to these efforts is a bold decentralization
programme to increase community participation, but
serious capacity constraints are apparent in most localities.

Ghana's smooth political transition in January 2001
brings hope that the new government will create an
atmosphere of transparency and participation. This
has led to more open debates on major policy reforms,
such as the recent increase in fuel prices, the adoption
of the Heavily Indebted Poor Countries Initiative,
and privatization of water.

Mauritius, with a long period of political stability,
remains a sterling example of democracy. The rule of
law prevails. Property rights are respected. And public
sector activities have been transparent and conducive
to private sector activities. The result: the transformation
of a poor country with a per capita income of $260
at the beginning of the 1960s to a middle-income country
with a per capita income of $3,800 in 2003.